Daily Macro: India Policy Rates – Case For A Cut Builds and more

In this briefing:

1. India Policy Rates – Case For A Cut Builds
2. Widodo Prevails in 1st Debate / Reform Discussed / BI Holds Rate / Poll Margins Steady / PSI Emerges
3. Stimulus/Bond Index Products/China-US Tension/Huawei Denials/Military

1. India Policy Rates – Case For A Cut Builds

A cut in interest rates is coming. The case is compelling. Headline inflation is easing and is now running well below the RBI’s forecasts. System non-performing loans have peaked while the trade deficit is narrowing meaning the central can afford some largess. Given where real lending rates are and the fragility of the corporate profit cycle, lower policy rates would welcome and a positive of the India growth story. We reiterate our overweight Indian equities call.

2. Widodo Prevails in 1st Debate / Reform Discussed / BI Holds Rate / Poll Margins Steady / PSI Emerges

BI held its benchmark rate steady due to current account concerns; in any event, bank credit growth suggests that the economy has considerable momentum despite international headwinds and the 2018 rate hikes.  Widodo did enough to surpass Prabowo in the 1st of 5 presidential debates, although Prabowo avoided gaffes and both candidates lacked energy.  Dubbed a ‘dud’ in headlines, it at least featured constructive discussion of bureaucratic reform.  Widodo also promised a National Legislative Center to rectify conflicting and excessive regulation.   A Charta Politik poll shows steady margins for Widodo and PDI-P as of late December and the sole reform-minded party, the new PSI, finally registered support of 1.5%.  Planners remain at odds over a location for a downtown terminus of Jakarta’s elevated LRT — a project crucial for complementing the imminent MRT. 

Politics: Despite a critical domestic press reaction and a lack of sensational moments, the first presidential debate produced the most detailed high‑level discussion of bureaucratic reform in more than a decade.  Overall, President Joko Widodo fared better than his challenger, Gerindra Chair Prabowo Subianto, but both seemed lacking in energy.  Both also succeeded in avoiding pitfalls: Widodo’s running mate, the aging cleric Mar’uf Amin, caused no major embarrassment for the ticket; and Prabowo maintained an even temper with no unseemly rants.  The candidates traded barbs: Prabowo hit home by questioning Widodo’s decision to appoint a “top law enforcement official” (i.e., the attorney general) who is a party representative; and Widodo twice inflicted damage by citing Gerindra’s lack of women in its leadership and its nomination of corruption convicts for legislative offices.  Widodo unveiled a plan for a National Legislative Center (Puslegnas).  The debate, translated in full by Ref Wkly, seems unlikely to alter the candidates’ poll positions (Page 2).  The president approved the release of the 80‑year‑old icon of terrorist groups, Abu Bakar Basyir (p. 15).  Widodo visited a fair for businesses run by impoverished households and, oddly, purchased 100,000 1‑liter bottles of dishsoap from one vendor.  At best, the episode may indicate a preoccupation with his family’s catering business; at worst, it shows haphazard handling of his personal finances (p. 16). 

Surveys: Charta Politik measured President Joko Widodo’s margin as being virtually unchanged at 19 percentage  points in late December.  It also confirmed that PDI‑P’s nomination of Widodo is a major reason for its popular support.  The pro‑reform Solidarity Party (PSI) finally registered detectable support of 1.5 percent (p. 17). 

Infrastructure: Differences between the central and provincial government persist over where to locate the terminus of the Light Rail Train (LRT) in downtown Jakarta.   A large land plot south of Landmark Tower has been vacant for decades – but the central government prefers a less central location (p. 19).   

Economics: The rupiah has partially rebounded amid easier external financing conditions in recent weeks, but Bank Indonesia (BI) nonetheless decided this week to maintain its benchmark rate at 6.0 percent – due to a persistently high current account deficit.  In part, the deficit reflects Indonesia’s considerable economic momentum.  Nonetheless, rising fuel imports and falling oil production signal continued current account pressure ahead, necessitating vigilance from BI (p. 20). 

3. Stimulus/Bond Index Products/China-US Tension/Huawei Denials/Military

China News That Matters

• Pump it up, but don’t flood the place
• Roll up, roll up: China touts bonds
• Sino-US trade talks shift to Washington
• Trust me, I’m just a sesame seed
• No longer playing catch up? The “world-leading” PLA